Working Capital Loan Assessment - How to handle Excess NWC

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About this video:
In this video we discuss a common issue that bankers face while renewing the working capital limit. Often we find that due excess NWC the working capital eligibility of the customers falls short than the sanctioned amount.
So how to renew the working capital limit?
Are you going to reduce it?
Or recall the facility?
Let's find out inside the video.
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[@ShuddhDesiBanking]

Looking for a detailed course in Credit. Your search ends here:
1. Credit Risk Analysis and Rating: bit.ly/37DXXhu - A 3 hours 30 minutes course for Bankers and Finance Professionals.
2. Take this course if you want to learn the details of NPA and SMA - bit.ly/IRACnorms

[@soumyaroy808]

Dear Sir, few observations and queries :
1) Are you considering gross sales of 75 lacs as projected sales or previous year sales as NWC is being taken from previous year and hence like for like comparison is to be done for finding out whether excess borrowing was done or there was a deficit in the year gone by ?
2) Can we say that excess borrowing during a year can be on two counts a) NWC becomes insufficient due to current ratio being less than the benchmark incase of MPBF method and b) NWC being more than the minimum margin requirement in case of Turnover method ?
3) Incase working capital eligibility comes 11 lacs but borrower asks for 10 lacs can we sanction 10 lacs wc loan ?
4) Along with the estimated and projected operating and asset liability statement in CMA do we also take the copy of projected operating statement and balance sheet with notes to accounts from the borrower so that we can classify the balance sheet items and direct and indirect cost and operating and non-operating revenue based on our own understanding just as we do in case of audited financials ?

[@ShuddhDesiBanking]

Thank you for some Good questions. Will try to answer them:
1) NWC is taken for the estimated or the projected year. Sales from projection and NWC from previous year is a contagious mistake practiced across industry. Please separate yourself from this.
2) Reason for excess borrowing that you have pointed out are effects they are not the causes. When something happens that triggers those ratios. For example if the owner tries to withdraw his own contribution that will lead to excess finance. Or money got stuck with debtors more than 6 months which we donot finance. These are actual causes.
3) Yes we can. In fact in most cases we do. Because we always take a declaration somewhere that in case there is a shortfall the borrower will bring the money.
4) No we don't. Notes are not provided with the projections or estimations. So while preparing our excel we follow the past trend. If there is a gap in understanding we specifically ask the borrower or his CA. That's how it happens.

[@soumyaroy9570]

@@ShuddhDesiBanking Thank you Sir! Understood the points 🙏

[@ashishimc]

Sir can u help in nwc balance sheet n dscr calculation

[@ravikumarpv6395]

After taking declaration,suppose the borrower does not purchase the fixed asset,then the impact on the next year balance sheet? How to reconcile the gross asset?

[@ShuddhDesiBanking]

This is a suggestion when bankers want to take a lenient view of the situation. Options for tough measures are always available. Obviously one cannot permit this to happen year after year.

[@vsubramanian5225]

You can call for specific reasons for not investing in the FA/NCA and take an assurance that he would be investing shortly. Otherwise, you always have an option to reduce the limit in future.

[@aarohisfinancialworld1833]

Sir there can be chances that the Borrower has categorised Obsolete Stocks and Long Pending Bookdebts in Current Assets. We can have agewise breakwise of bookdebts and details of obsolete stocks and Classify them in Non Current Assets. This will lead to reduction in CA and thus Reduction in high NWC. Whats Your Opinion regarding this.

[@vsubramanian5225]

@@aarohisfinancialworld1833.
Though this can be done, showing obsolete/ slow moving stocks and overdue bookdebts in Stock statements/ current assets by the borrower doesn't reflect well on his integrity. Further, if he is doing it, he is already drawing more than he is eligible for.

[@vsubramanian5225]

Further, even if he gets a higher limit his Drawing Power would be less if we ignore obsolete stocks and overdue book debts.

[@subhashapte8841]

How should renewal of Fund based Working Capital limits be assessed when Company has availed Financial Bank Guarantee limits

[@vsubramanian5225]

The fund based limits are to be assessed independent of Non- fund based limits. Non-fund based limits like BG/LC have different types of assessments.

[@subhashapte8841]

@@vsubramanian5225. Thnx for reply. However, when Advances received from Customers for working capital against Financial BG availed are not shown in projected CMA, then won't it lead to overfunding. If you can clarify

[@vsubramanian5225]

@@subhashapte8841 The advances received from customers against financial BG availed, will be reflected in the CMA, generally in the form of cash and bank balance, stock or advances to customers. The entry is nullified by the matching entry in current liabilities. So, if you have issued BG for mobilization of advance, and if the same is not reflected anywhere as a current asset we can seek clarification from the customer.

[@ShuddhDesiBanking]

Thank you Sir. For a crisp and clear explanation.

[@miguelcunningham1812]

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